Taxing the sick to death

Critics of free trade and intellectual property constantly blame the subcontinent’s terrible record on healthcare on high drug prices. Yet, our recently published research Death and Taxes shows the governments of India, Pakistan, Nepal and Bangladesh callously inflate the price of medicines with import tariffs and taxes—levies on the sick.

In a self-defeating bid for cheaper medicines, these governments also control most drug prices, trying to keep down prices of these apparently expensive drugs but restricting the availability of good medicines and encouraging fakes.

Simple economics dictates that if the government limits the profit that can be made on a product, producers and retailers will move to other products. The result of price controls is almost always shortages —like the vitamin C shortage in India caused in late 2008 by a combination of import restrictions and price caps.

Because they discourage manufacturers of high-quality drugs from supplying the market, price controls also create opportunities for less stringent manufacturers, including purveyors of spurious drugs. India, Pakistan, Nepal and Bangladesh all have a major problem with substandard medicines, with studies showing up to 10% in India.

India’s complex and arbitrary system of drug price controls sees bureaucrats constantly tinkering with the list, sowing confusion among producers, importers and retailers. Aside from being expensive to manage, India’s price controls have had some nasty side effects, notably in the emergence of so-called “irrational” drug combinations—two or more drugs spliced together to sidestep the price controls.

Biochemists do not know how these combination drugs affect the human body or if they could represent a serious health risk to patients. The regulator has already banned some 300 formulations selling under at least 1,000 brands.

If India’s drug prices are so high as to warrant a blunt weapon such as price controls, why does the government increase the price of imported medicines by 10%, as well as charge 4% VAT, or value-added tax?

It’s not even a money-spinner: According to the World Health Organization, in 2001, India derived revenue worth only 0.0094% of its gross domestic product from medicine tariffs, which were then between 30% and 35%.

Even India’s vast quantities of locally manufactured drugs have their prices inflated by the government’s 10% tariff on imported ingredients plus VAT. These taxes mean higher prices for patients, which the government then tries to squeeze with complicated and harmful price controls. This defies logic.

This isn’t just an India story. Pakistanis have to pay a 10% government tariff on imported drugs, as also a 17.5% tariff on certain antibiotics. Then there’s an additional 16% VAT.

Nepal is also guilty of performing this contrary dance of taxing medicines, then stepping in again to cap the price. Nepal’s tariffs are higher, at 15%, despite the fact that it imports around 65% of its medicines, mainly from India. Bangladesh charges 8.32% on imported medicines. One country in the region, however, that does not tax the sick and the suffering is Sri Lanka, which has had tariff-free medicines for at least a decade.

Many poorer countries in Africa, such as Kenya, Rwanda and Gabon, have abolished tariffs on medicines in recent years. Richer countries in Europe and North America have long abandoned levies on drugs, realizing it is a regressive tax that hits the poor and sick hardest.

The subcontinent faces myriad health problems, from medieval diseases such as cholera to ailments more associated with modernity, such as diabetes. Yet, most governments are increasing prices and damaging the quality and availability of medicines through tariffs. It is time they were abolished for good, for the good of all.

Philip Stevens is a senior fellow at International Policy Network, a London-based think tank, and the author of the study Death and Taxes (published this week). Comment at otherviews@livemint.com